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Tuesday, 24 January 2012

Tax heat on Mauritius shell firms

Tax heat on Mauritius shell firms

New Delhi, Jan. 22: Negotiators working on the revised India-Mauritius tax treaty are likely to insert a “limitation of benefits” clause that will enable New Delhi to disallow tax exemptions claimed by third country firms using the Mauritius route to buy shell companies with underlying Indian assets. The negotiations are likely to be over ahead of the Mauritius Prime Minister Navinchandra Ramgoolam’s India visit next month.

Officials of the Central Board of Direct Taxes have long claimed that the Vodafone deal was done through tax haven Cayman Islands to take advantage of what it termed as “treaty shopping”. Vodafone on Friday won a major battle when the Supreme Court set aside a Bombay High Court verdict that had held that the Indian income tax authorities had the jurisdiction to levy Rs 11,000 crore as tax on a deal involving the payment of around $11 billion to Hutchison Telecommunication International Ltd.

The Mauritius treaty is important for India as in the last decade foreign direct investment into India from the island nation totalled $55.2 billion, comprising about 42 per cent of the $133-billion foreign investment in the country.

The limitation of benefits clause was described by CBDT officials as an “anti-abuse provision which disallows tax exemptions to shell companies set up merely to use provisions of the double taxation treaty to buy Indian assets but avoid tax payouts”.

India has introduced such provisions in tax treaties with Singapore and the UAE. India renegotiated the treaty with Singapore to prevent third country residents from misusing the capital gains exemption rule by establishing a holding company in Singapore.

The Singapore tax treaty clearly says that genuine companies are only those which are listed on recognised stock exchanges there, or whose annual expenditure on operations is equal to or more than Singapore$200,000 in the 24 months immediately before the date the capital gains arise. Others will be treated as shell companies that were set up to avoid taxes.

The clauses added to the India-UAE treaty were broader and applied to all benefits under the double taxation avoidance agreement. It stated that tax benefits would not be given to a firm if “the main purpose or one of the main purposes of the creation of such an entity was to obtain the benefits” of the tax treaty.

Officials said that the limitation of benefits clause for the tax treaties would be in addition to the general anti-avoidance rules (GAAR), likely to be announced with the new Direct Tax Code. GAAR allows tax authorities to declare any business deal to be an “impermissible avoidance arrangement” if part or whole of the deal has been crafted with the intention of obtaining tax benefits.

“India may not agree in the future to give tax benefits to a company which has simply been set up in Mauritius as a screen to buy an Indian asset by a third firm to avoid paying tax. This kind of corporate operation is called treaty shopping and we could crack down on it by rewriting the DTAAs,” officials said.

Indian and Mauritian officials have been working on rewriting the treaty after accusations by Indian politicians and the media that the treaty was being abused.

The revised Double Taxation Avoidance Convention (DTAC) is also expected to allow the sharing of banking and tax-related information between the two countries and prevent money laundering and the evasion of taxes.

The changes to be brought into the treaty are also expected to address concerns that investments on Indian bourses are often routed through Mauritius to avoid the short-term capital gains tax of 10 per cent. About 40 per cent of all foreign institutional investments in India are routed through this tiny island on the Indian Ocean.